EXPLAINER ON CARBON CREDITS: 101

Carbon Credits: What's all the hype?

Carbon credits play a pivotal role in the global effort to combat climate change by providing a mechanism to incentivize emission reduction initiatives. A carbon credit represents a metric ton of carbon dioxide equivalent (tCO2e) that is either avoided or removed from the atmosphere.

GHG Avoidance

GHG Removal

Greenhouse gas (GHG) emissions are avoided when, for example, a renewable energy plant displaces electricity from a coal-fired power plant, resulting in an equal quantity of electricity but no GHG emissions. GHG emissions are removed when, for example, illegally deforested land is restored This system operates under the broader framework of carbon markets, where entities can trade these credits as part of strategies to meet emission reduction targets.

Why the buzz??

A carbon credit is essentially a tradable permit or certificate that signifies the removal or avoidance of GHG emissions. These emissions can originate from various sources, including industrial processes, energy production, or deforestation. Each credit is issued by a carbon credit standard and is traceable. Carbon standards set out rules and requirements which projects are audited against to ensure the emission reductions are credible, real, and additional. Several global bodies have emerged to tackle industry challenges such as integrity (i.e., ICVCM), market participation (i.e., IETA) and self-regulation (i.e., ICROA).

Why Carbon Credits Rock?

Carbon credits provide a market-driven incentive for entities to invest in emission reduction projects. They contribute to the mitigation of climate change by promoting sustainable practices. Some examples are renewable energy projects, energy efficiency projects and reforestation efforts. The carbon credit system essentially puts a price on carbon, encouraging businesses to adopt cleaner technologies and processes.

Project Developers' Perks

For developers of carbon credits there are two main benefits. Firstly, projects which have a significant benefit but are not feasible on their own, have a route to additional revenue and feasibility. Secondly, companies engaged in the market, as buyers may support the project with the promise of carbon credits in years to come. Essentially carbon credits open new routes to finance and up-front financing of projects.

BENEFITS FOR CREDIT BUYERS

Buyers of carbon credits, often corporations seeking to offset their emissions, gain a valuable tool for achieving carbon neutrality. Purchasing credits allows them to compensate for emissions they cannot eliminate internally, whether this is from an operational or financial feasibility angle. This aligns with corporate sustainability goals, enhances reputation, and may even offer cost savings compared to direct emission reductions.

THE PROCESS

Project Development – A project developer identifies an opportunity for emission reduction or removal.

Carbon Credit Standard – The project developer identifies the standard most aligned to the project with approved methodologies for the project being undertaken.

Methodology – The project follows an approved methodology to quantify the emission reductions, ensuring credibility and consistency.

Validation and Verification – Independent third-party auditing confirms that the project operates as reported and the emission reductions are real, additional, and adhere to established standards.

Issuance – Upon verification by the auditor, carbon credits are issued, each representing one tCO2e avoided or removed.

Registry – Credits are recorded in a registry, ensuring transparency and preventing double counting.

Trade – Credits can be sold in the domestic or international carbon market to entities seeking to offset their emissions.

What's the Earth High-Five for these Climate Wins ?

Carbon credits contribute to a net reduction in global greenhouse gas emissions. By creating financial support for emission reduction projects, carbon credits drive the development of sustainable practices and projects that enhance carbon sequestration. Ultimately, they play a vital role in meeting climate targets outlined in international agreements.

Wrap-Up Wisdom

Climate Finance operates at the intersection of environmental sustainability and economic viability. It empowers project developers to implement climate-friendly initiatives while offering businesses a tangible and tradable means to offset their carbon footprint. In a world increasingly focused on climate action, carbon credits stand as a practical and scalable solution to drive positive environmental impact while fostering economic growth.

Explainer on Carbon Credits